A term means something and applies somewhere.

Words are redefined all the time. Kilo should mean 1000. It was the international standard definition for 150 years. But now with computers it means 1024.

Confabulation would have been a better choice. But people have chosen hallucinate.

Hallucinate is the word that has been assigned to what you described. When you don’t assign additional emotional baggage to the word, hallucinate is a reasonable word to pick to decribe when an llm follows a chain of words that have internal correlation but no basis in external reality.